Bill Gross: Fed can only hike so much before it 'really starts to bite' housing

  • As the Fed continues to gradually increase interest rates, it should be sure to not raise them too much or it could really affect the housing market, bond guru Bill Gross said.
  • The central bank announced on Wednesday it was raising rates, pushing the target range to 1.25 percent to 1.5 percent.
  • "The Fed has to stop around 2 to 2.25 percent before it really starts to bite," Gross said.

As the Federal Reserve continues to gradually increase interest rates, it should be sure to not raise them too much or it could really affect the housing market, bond guru Bill Gross told CNBC on Wednesday.

The central bank announced Wednesday that it was raising rates, pushing the target range to 1.25 percent to 1.5 percent. It also indicated it expects to hike three times in 2018.

"The Fed has to stop around 2 to 2.25 percent before it really starts to bite," the Janus Henderson portfolio manager said in an interview with "Power Lunch."

"A lot [of mortgages] are variable, floating-rate mortgages. And to the extent that the Fed has already raised interest rates by 75 to 100 basis points and is expect to raise by another 50 to 100 that affects the average monthly payments."

He compared it to a similar situation in 2005 and 2006 when the Fed boosted rates to 5.25 percent, although he noted that was a more extreme case.

"It affected the floating-rate mortgages, the subprime mortgages, and it created a crisis," Gross said.

As for those who may think the central bank could hike more aggressively next year, Gross disagrees. He's predicting two to three increases.

That's because he believes the federal funds need to be at a zero percent real rate; for example a 2 percent fed funds rate coupled with 2 percent inflation.

"That's where the Fed is trying to go, although inflation is not sort of abiding by their future projections." Gross said.

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